Jones Lang LaSalle: Outlook on “Recession Resistant” Healthcare Sector

The healthcare industry will remain in demand in the new year, with healthcare reform heavily influencing the sector, according to a Jones Lang LaSalle report on Healthcare Real Estate Conditions in 2012.

It will be a year of hospital mergers and acquisitions as organizations seek to create operational efficiencies and ways to rationalize their footprint while reducing annual capital spending, predicts the financial services firm.

“Hospital merger and acquisition activity will be a major theme in the healthcare industry in 2012,” said Mindy Berman, managing director, healthcare capital markets, Jones Lang LaSalle, in a statement. “This activity involves not only hospital to hospital combinations with numerous permutations on the theme but also combinations with highly prized physician practice groups.  All of this M&A activity comes with a lot of real estate baggage.”

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There will be “strong levels of activity” in areas of dispositions, monetizations, and sale-leasebacks, according to Berman, who says there continues to be “strong investor demand for healthcare related real estate.”

“We expect the product sector to remain much in demand in 2012 as the broader economy continues to struggle to re-energize itself,” she continued. “The proven track record of healthcare real estate through downturns and the compelling demographics of the sector will keep propelling activity and pricing levels throughout 2012.”

Healthcare REITs dominated the 2011 market, raising more than $18 billion in debt and equity capital in 2010 through Nov. 2011, and with healthcare as a top-income producing property type, generating higher average dividend yields than industrial, office, and apartment REITs, the asset class is “about as ‘recession-resistant’ as possible which makes it a preferred class today,” Berman said.

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Other areas that will be shaped by healthcare reform include outpatient care, thanks to the accountable care movement.

The strongest side of the business from a planning and development perspective, according to Jones Lang LaSalle’s managing director of healthcare development programs Shawn Janus, is the outpatient arena.

“As we see accountable care embraced, we are seeing outpatient and community-based facility activity,” Janus said. “That market is coming back, and the design and funding of these facilities is evolving.”

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Medical office building projects will be a busy area in 2012, the firm says. However, aging facilities will face operational challenges as they get older and new development lags, especially as operators struggle financially from dealing with fluctuating reimbursement cycles.

“Many institutions have had to ask—and will continue to have to evaluate—whether they are investing enough to at least maintain the average age,” Scot Latimer, managing director of Jones Lang LaSalle’s strategic planning capabilities, said in the report. “Unfortunately, the answer is no, which has created this looming overhang. We had hoped that with the investments of the last decade these problems would mitigate, but the steep decline in investment the last three years has us right back where we were 10 years ago, and the issue is not going away.”

Written by Alyssa Gerace